[CutePuppy]

Andy describes very well a short term liquidity crunch that is ever so present in financial institutions, and makes them vulnerable to "bear raids" and/or "run on the bank' that have ravaged banks during 1930s.

Andy Kessler (born 1958) was co-founder and President of Velocity Capital Management, an investment firm based in Palo Alto, California. He is an author of several books on business, technology, and the health field and has also contributed to The Wall Street Journal.

Books by Andy Kessler:

The End of Medicine: How Silicon Valley (and Naked Mice) Will Reboot Your Doctor‎ - 2006 - 354 pages

Running money: hedge fund honchos, monster markets and my hunt for the big score‎ - 2004 - 312 pages

How We Got Here: A Slightly Irreverent History of Technology and Markets‎ - 2005 - 272 pages

Wall Street Meat: My Narrow Escape from the Stock Market Grinder‎ - 2004 - 272 pages

[dr_lew]

I can’t even understand Contract Bridge.

[Fee]

Private public funding of hedge funds to leverage money to buy toxic assets. If economy recovers, hedge fund keeps all the profits, and if economy falters and the funds lose money, taxpayer eats the losses. Wall Street via politicians have hijacked Wash DC and made arrangements where only the taxpayers will be screwed when everything goes wrong again.

[JasonC]

"banks believe these assets are extremely undervalued"

That's because they are.

The details of the asset plan make sense. Basically they are going to put the FDIC on the hook for debt written against these assets, up to 6 to 1 leverage or so. That means the "carry" on them will be huge, because debt can be issued against them at insured CD rates.

Do some vulture investors want 30 cents on the dollar when the things are really worth 60? Sure, they'd like to freely double their money. But if you can borrow most of the price, you can double your *equity* paying 50, if they are really worth 60. It is a perfectly sensible plan, and all the "it won't work" nonsense is based on the same old puritanical market-perfection belief that the lowest quotes to date are the "true value". Which is nonsense, and the banks know it is nonsense. So will the new players who take these deals. PIMCO isn't going to hold out for 30 when they can do the math and see they can double their money paying 50.

[Recovering_Democrat]

I’m confused.

[politicket]

Ping for later reading...

[Mad Dawg]

I think anyone thinking of jumping in ought to study and take to heart the treacherous and devastating slide of the Dow from October of 1929 into the mid thirties. There were a lot of what only later were seen as bear market rallies.

It's not really clear here , but if you look carefully you'll see some rallies on the long slow decline. Then imagine all the wise saying that we've hit bottom. That only has to happen a few times for a lot of people to lose every dime they've got.

[glorgau]

Only one sentence needs to be read:

“Those that mismatched duration set themselves up to be clawed. “

[central_va]

We will see DOW 5,000 before we see DOW 10,000 again.

[IamConservative]

In a typical bear raid, traders short a target stock -- i.e., borrow shares and then sell them, hoping to cover or replace them at a cheaper price.

Short sellers in the market serve a purpose. They sniff out over valued stock and help prevent bubbles from being created. Generally, it is a good thing, when done legally.

What the author fails to explore here is illegal naked shorting. Traders selling shares that don't exist and that have no intention or ability to deliver. Trades that never settle. In effect, stealing shareholder value right in plain sight.

[Praxeologue]

Andy Kessler says that "all of this is just a bear raid";. This demagoguery will sell books, which is part of Kessler's MO. Short selling is cathartic. The most accurate thing Kessler says is that short selling forced writedowns quickly rather than being papered over for 5 to 10 years. That hasn't happened yet, but let's hope it does. Nevertheless, it demonstrates that Kessler understands the value of short selling. As for bear raids, they work until they don't, at which point the raiders can lose their stake.

CEOs like Jeffrey Immelt like to blame market manipulators, in another era it would have been "the Jews", but the damning truth is that he used his shareholders' money to overpay for assets and assume risk for insufficient premiums. He is blaming speculators for his mismanagement, or worse.

What really happened was that over a decade, credit was extended and risks were assumed with other people's money without any underwriting standards, creating $10 trillion or so (that's everything) of unrecognized losses. Certain events exacerbated this, such as an extra trillion when Spitzer took Greenberg off the case so that Cassano could run wild.

There is nothing wrong with an unregulated CDS market. The root of the problem is other people's money. A case in point is that Wall Street firms somehow managed to survive, or morph, for a century or so until they went public. No sooner did that happen than somehow they became dens of bad underwriting and became supplicants to the public purse.

The market was exacting its own solution until government started to meddle. Stupid government action can be played by free market actors, and that is what is happening. No outrage here.

My solution? Let nature take its course. However, post Bear Stearns, post AIG, post reason, that is not going to happen. All we can do is nip at the heels of the demagogues.